Exam 20: Corporate Risk Management

Assume that the current price of DEY stock is $25, that a 1 year call option on the stock has a strike or exercise price of $27.50, the risk free rate is 4%, and that you have calculated N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option.

As the risk free rate of return increases, the value of call options ________ and the value of put options ________.

The decision to purchase insurance is justified if the cost of the contract is less than the expected loss.

The seller of credit default swaps

What are the differences between forward contracts and futures contracts? What are some advantages and disadvantages of each?

Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November. In January, they enters into an agreement to buy the wine at a price of 34.62 euros to the case. Payment will be due at the end of November. They expect to sell the wine to restaurants and retailers for $63 per case. Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro. If the spot exchange rate at the end of November is $1.35/euro, Hudson Valley's gross profit will be

Options can only be purchased for individual stocks, not for funds or indexes.

European and American are different types of stock options and have nothing to do with where the options are bought and sold.

Assume that the current price of FGX stock is $35, that a 6 month call option on the stock has a strike or exercise price of $33.00, the risk free rate is 4%, and that you have calculated N(d1) as .65 and N(d2) as .55. Use the Black-Scholes model to calculate the price of the option.

Assume that the current price of DEY stock is $25, that a 6 month call option on the stock has a strike or exercise price of $27.50, the risk free rate is 4%, and that you have calculated N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option.

A(n) ________ gives the holder the right to buy a stated number of shares at a specified price for a limited time.

A manufacturer of breakfast cereals should always be fully hedged against both rising and falling grain prices.

Which of the following risks would be the best candidate for self insurance?

Assume that N(d1) = .63105 and N(d2) = .50735. Compute the value of the call option using the Black -Scholes option pricing model.

What is the general rule that firms should follow when deciding how much risk to assume?

Ahmad bought put options on Home Depot with a strike price of $130. The option premium was $2.83. Just before the contract expired, Home Depot stock was at $132.83 per share. Ahmad

Which of the following is NOT an advantage of futures contracts?

The objective of a prudent financial manager is to eliminate all foreign exchange risk.

What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

The writer of an option keeps the option premium regardless of whether or not the option is ever exercised.